A beneficiary designation is, in essence, a contract between a client and a financial institution or a bank. Beneficiary designations are most commonly seen on life insurance policies and retirement accounts. Often, the operation of a beneficiary designation is that any item that has a beneficiary designation passes outside of the terms of a decedent’s last will and testament or a trust. A common misperception is that a will or trust provision supersedes a beneficiary designation. When beneficiary designations are not coordinated with an overall estate plan, it sometimes results in unintended beneficiaries or an illiquid estate.
Due to the sometimes complex nature of these processes, it is extremely important to contact an estate planning attorney immediately. A lawyer in Virginia can help you understand this process, and advise you how to best proceed with your specific situation. Beneficiary designation is an extremely important part of an individual’s will or trust, and should be treated with extreme care under the guidance of an attorney.
Understanding Beneficiary Designation
Beneficiary designation is often brought up when individuals are creating their will. For example, an individual may write a will or a trust and say, “I’ll leave everything to my three children in equal shares, outright and free of trust,” with the intention that each of their children receive an equal portion of their estate. However, when they visit their local bank or talk to their broker, the broker may urge them to name a beneficiary on their account. If the beneficiary designation names one child, the likelihood is that all of the assets with the beneficiary designation are going to pass at death to the one child resulting in an unequal distribution among the decedent’s three children.
The other problem is that the same decedent may be exposed to federal estate tax. Federal estate taxes are due nine months from the decedent’s death. Simply because there are no assets in the probate estate does not mean that the estate can pass free of estate tax. While the probate estate may only include assets in the decedent’s sole name on the date of death, the taxable estate includes all assets including those with a beneficiary designation that were in the decedent’s control. The result of having beneficiary designations that are not coordinated with the overall estate plan could result in an estate that is illiquid and provide for unequal distribution to unintended beneficiaries.
While an individual maintains capacity, beneficiary designations can be changed or modified. At the client’s request, an attorney will often work with clients to coordinate their beneficiary designations with their overall estate plan.
Retirement accounts are unique in the fact that some of them are tax-deferred. Because of tax deferral, it is common for many retirement accounts to have a beneficiary designation. Because of the unique tax status, coordinating beneficiary designations with an overall estate plan for retirement assets can be important so that additional tax liability can be avoided. An attorney can assist clients at their request, with the preparation of sample language to provide to banks, brokerage, and financial institutions to coordinate those assets with the client’s overall estate plan.